Analysts warn of lean quarters ahead, even as TCS profits soar

New Delhi: IT services giant Tata Consultancy Services (TCS) reported an 8.4% rise in its net profit for the quarter-ended September (Q2FY23), at ₹10,431 crore compared to ₹9,624 crore reported during the corresponding quarter previous year (Q2FY22). However, analysts warned that the company’s growth is on the back of order completions of the past two years, and sequential drops may be expected in the coming quarters.

The IT services major reported a constant currency growth of 15.4% year-on-year with an orderbook of $8.1 billion. TCS’ topline saw a rise of 18% to Rs 55,309 crore versus Rs 46,867 crore year-on-year. The IT services major has also announced a second interim dividend of Rs 8 per share. It has 18 October as the record date.

Shares of TCS ended with mild gains of 1.84% at ₹3,121 apiece on Monday, ahead of the quarterly financial results. 

On the operational front, TCS’ earnings before interest and taxation (Ebit) for Q2 saw a rise of 10.8%, at ₹13,279 crore versus ₹12,000 crore y-o-y. Ebit margin came in 24%, up 20 basis points (bps) from 23.8% during the same quarter last fiscal. One basis point is one-hundredth of the percentage point. 

Earnings before interest, taxation, depreciation and amortization (Ebitda) rose 10.7% to ₹14,516 crore versus ₹13,116 crore y-o-y.

“Demand for our services continues to be very strong. We registered strong, profitable growth across all our industry verticals and in all our major markets. Our order book is holding up well, with a healthy mix of growth and transformation initiatives, cloud migration and outsourcing engagements. As clients prepare for a more challenging environment ahead, technologies like cloud now have to be fully leveraged to realize the promised value,” said Rajesh Gopinathan, managing director and chief executive officer, TCS in the quarterly review statement.

According to the statement, segmentally, TCS saw broad-based growth across verticals, led by retail, which saw 22.9% y-o-y growth in constant currency terms and CMI, up 18.7% in constant currency terms. 

Among the Western markets, TCS registered a 17.6% growth in North America, 14.1% in continental Europe and 14.8% in the UK. The IT major saw a 16.7% rise in the Indian market, while LatAm grew 19%, MENA (Middle East and North Africa) 8.2% and Asia-Pacific 7%. 

“We are making our way towards achieving our operating margin priority for the year, aided by good growth, the flattening of the workforce pyramid, improving productivity and currency support. The headwinds from the supply-side challenges are abating, so that sets us up well for the seasonally weak second half of the year,” said Samir Seksaria, chief financial officer, TCS.

TCS has added 9,840 employees, taking the total headcount of the company to 6.16 lakh employees.

“Reflecting our culture of being committed to our employees, we have honoured all job offers we had made. Our investments in capacity building and organic talent development have allowed us to grow our business ahead of headcount addition this quarter,” Milind Lakkad, chief human resoruces officer at TCS said.

Commenting on the 21.5% IT services attrition rate this quarter, Lakkad added, “We believe our quarterly annualized attrition has peaked in Q2 and should see it taper down from this point, while compensation expectations of experienced professionals moderate.”

However, while the IT major beat market estimates to post strong figures for the quarter, analysts signaled a sign of caution for the quarters going forward. Akshara Bassi, research analyst, global cloud and servers market at market research firm Counterpoint Research, said that most of the numbers reported for the quarter by TCS are “coming off the completion of orders they have received across international markets over the past two years.”

“This reflects their performance and demand for digital transformation among organizations across the world through the pandemic period, which is likely what has boosted the net profit figures,” she said.

Mitul Shah, head of research at Reliance Securities, concurred that IT services “would not remain immune to worsening global macros in terms of rising currency headwinds and likely cut on spending.”

This cut in spending in TCS’ key markets going forward will likely lead to sequential declines over the next two quarters. Counterpoint’s Bassi said that the US Fed rate hike, coupled with inflationary headwinds in the North American market “may lead to a sequential decline in overall revenues and earnings in the December and March quarter.”

Kashyap Kompella, chief executive of industry research firm RPA2AI Research, added, “The recessionary clouds are expected to intensify in the next few quarters in core customer markets, and the overall demand for technology services can be impacted.”

Reliance Securities’ Shah predicted that revenue growth for TCS would “taper down to low double digit in FY24”, while there could also be a “sequential decline in order book, clear lower employee addition, higher attrition, and lower pricing power.”

However, to be sure, IT services firms are also likely to see an uptick in demand due to the advent of 5G services in India and around the world. Counterpoint’s Bassi said that 5G services “will create a strong market for IT services providers — even in our domestic market. This can see IT companies, including smaller firms, maintain some momentum going forward.”

Kompella added that TCS may also be able to “manage” attracting and retaining of talent well, even as the hiring market cools down.

With inputs from Shouvik Das and Devina Sengupta.